##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13
or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended February 26, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13
or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File No. 0-12867
 
 3COM CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2605794(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)350 Campus Drive 
Marlborough, Massachusetts
    
    01752(Address of principal executive offices)
    
    (Zip Code)
 508) 323-1000
 N/A
 þ o
 o o
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



3COM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2010
TABLE OF CONTENTS
 PagePART I.
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Condensed Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended February 28, 2010 and 2009
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
February 28, 2010 and May 31, 2009
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended February 28, 2010 and 2009
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4.
    
    Controls and Procedures
    
    
    39PART II.
    
    OTHER INFORMATION
    
    
    39Item 1.
    
    Legal Proceedings
    
    
    39Item 1A.
    
    Risk Factors
    
    
    39Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    52Item 5.
    
    Other Information
    
    
    52Item 6.
    
    Exhibits
    
    
    53SIGNATURES
    
    
    
    
    54EXHIBITS
    
    
    
    
    55EX-31.1EX-31.2EX-32.1




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,(In thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Sales
    
    $
    345,880
    
    
    $
    324,707
    
    
    $
    958,546
    
    
    $
    1,021,919Cost of sales
    
    
    137,086
    
    
    
    138,878
    
    
    
    389,559
    
    
    
    446,671Gross profit
    
    
    208,794
    
    
    
    185,829
    
    
    
    568,987
    
    
    
    575,248Operating expenses (income):Sales and marketing
    
    
    100,543
    
    
    
    85,541
    
    
    
    279,085
    
    
    
    262,943Research and development
    
    
    47,997
    
    
    
    45,229
    
    
    
    128,365
    
    
    
    141,630General and administrative
    
    
    21,323
    
    
    
    27,593
    
    
    
    68,479
    
    
    
    80,699Amortization
    
    
    16,506
    
    
    
    23,106
    
    
    
    50,332
    
    
    
    73,330Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,000
    )Restructuring charges
    
    
    47
    
    
    
    2,860
    
    
    
    2,732
    
    
    
    7,361Operating expenses, net
    
    
    186,416
    
    
    
    184,329
    
    
    
    528,993
    
    
    
    495,963Operating income
    
    
    22,378
    
    
    
    1,500
    
    
    
    39,994
    
    
    
    79,285Interest income (expense), net
    
    
    683
    
    
    
    (3,333
    )
    
    
    (2,327
    )
    
    
    (5,131
    )Other income, net
    
    
    19,676
    
    
    
    16,528
    
    
    
    37,143
    
    
    
    45,298Income before income taxes
    
    
    42,737
    
    
    
    14,695
    
    
    
    74,810
    
    
    
    119,452Income tax provision
    
    
    (1,346
    )
    
    
    (12,828
    )
    
    
    (5,966
    )
    
    
    (24,878
    )Net income
    
    $
    41,391
    
    
    $
    1,867
    
    
    $
    68,844
    
    
    $
    94,574Basic net income per share
    
    $
    0.10
    
    
    $
    0.00
    
    
    $
    0.17
    
    
    $
    0.24Diluted net income per share
    
    $
    0.10
    
    
    $
    0.00
    
    
    $
    0.17
    
    
    $
    0.24Shares used in computing per share amounts:Basic
    
    
    396,253
    
    
    
    384,679
    
    
    
    392,905
    
    
    
    393,868Diluted
    
    
    411,546
    
    
    
    386,377
    
    
    
    403,771
    
    
    
    395,232
  1




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3COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 February 28,
    
    
    May 31,(In thousands, except per share data)
    
    2010
    
    
    2009ASSETSCurrent assets:Cash and equivalents
    
    $
    795,014
    
    
    $
    545,818Short-term investments
    
    
    
    
    
    
    98,357Notes receivable
    
    
    26,688
    
    
    
    40,590Accounts receivable, less allowance for doubtful accounts
of $9,019 and $9,645, respectively
    
    
    129,998
    
    
    
    112,771Inventories
    
    
    114,972
    
    
    
    90,395Other current assets
    
    
    48,977
    
    
    
    56,982Total current assets
    
    
    1,115,649
    
    
    
    944,913Property and equipment, less accumulated
depreciation of $176,652 and $172,717,
respectively
    
    
    36,747
    
    
    
    40,012Goodwill
    
    
    609,297
    
    
    
    609,297Intangible assets, net
    
    
    148,432
    
    
    
    198,624Deposits and other assets
    
    
    22,823
    
    
    
    22,511Total assets
    
    $
    1,932,948
    
    
    $
    1,815,357LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    74,907
    
    
    $
    68,350Current portion of long-term debt
    
    
    48,000
    
    
    
    48,000Accrued liabilities and other
    
    
    484,388
    
    
    
    394,103Total current liabilities
    
    
    607,295
    
    
    
    510,453Deferred taxes and long-term obligations
    
    
    37,218
    
    
    
    40,729Long-term debt
    
    
    64,000
    
    
    
    152,000Stockholders equity:Preferred stock, $0.01 par value,
10,000 shares authorized; none
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value,
990,000 shares authorized; shares
issued: 398,088 and 389,284,
respectively
    
    
    2,378,781
    
    
    
    2,336,961Retained deficit
    
    
    (1,221,678
    )
    
    
    (1,290,522
    )Accumulated other comprehensive income
    
    
    67,332
    
    
    
    65,736Total stockholders equity
    
    
    1,224,435
    
    
    
    1,112,175Total liabilities and stockholders equity
    
    $
    1,932,948
    
    
    $
    1,815,357
  2




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3COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedFebruary 28,(In thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    68,844
    
    
    $
    94,574Adjustments to reconcile net income to cash
provided by operating activities:Depreciation and amortization
    
    
    66,467
    
    
    
    97,156Stock-based compensation expense
    
    
    17,579
    
    
    
    18,187Impairment of property and equipment
    
    
    
    
    
    
    1,150Loss on property and equipment disposals
    
    
    288
    
    
    
    581Deferred income taxes
    
    
    (12,123
    )
    
    
    (7,466
    )Changes in assets and liabilities:Accounts and notes receivable
    
    
    (3,243
    )
    
    
    (13,560
    )Inventories
    
    
    (23,319
    )
    
    
    (22,006
    )Other assets
    
    
    15,667
    
    
    
    6,771Accounts payable
    
    
    6,247
    
    
    
    (20,929
    )Other liabilities
    
    
    88,393
    
    
    
    41,874Net cash provided by operating activities
    
    
    224,800
    
    
    
    196,332Cash flows from investing activities:Proceeds from maturities and sales of investments
    
    
    98,661
    
    
    
    Purchases of property and equipment
    
    
    (11,170
    )
    
    
    (12,778
    )Proceeds from sale of property and equipment
    
    
    40
    
    
    
    223Net cash provided by (used in) investing activities
    
    
    87,531
    
    
    
    (12,555
    )Cash flows from financing activities:Issuances of common stock
    
    
    28,480
    
    
    
    3,022Repurchases of common stock
    
    
    (4,158
    )
    
    
    (51,383
    )Repayment of long term debt
    
    
    (88,000
    )
    
    
    (88,000
    )Net cash used in financing activities
    
    
    (63,678
    )
    
    
    (136,361
    )Effect of exchange rate changes on cash and equivalents
    
    
    543
    
    
    
    8,901Net change in cash and equivalents during period
    
    
    249,196
    
    
    
    56,317Cash and equivalents, beginning of period
    
    
    545,818
    
    
    
    503,644Cash and equivalents, end of period
    
    $
    795,014
    
    
    $
    559,961
  3




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3COM CORPORATION  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. BASIS OF PRESENTATION
    Accounting Pronouncements
 Recently Issued and Adopted Accounting Pronouncements
 Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements
 4




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Fair Value Measurements and Disclosures
  Impairments of Debt Securities
 Earnings Per Share:
 Recently Issued but Not Yet Adopted Accounting Pronouncements
 Revenue Arrangements with Multiple Deliverables
 Revenue Arrangements with Software Elements
 Variable Interest Entities and Transfers of Financial Assets and Extinguishments of Liabilities
 5




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NOTE 2. STOCK-BASED COMPENSATION
    Three Months Ended February 28,
    
    Nine Months Ended February 28,2010
    
    2009
    
    2010
    
    2009Employee stock options:Volatility
    
    
    *
    
    
    
    51.3
    %
    
    
    57.0
    %
    
    
    51.3
    %Risk-free interest rate
    
    
    *
    
    
    
    1.9
    %
    
    
    2.1
    %
    
    
    2.6
    %Dividend yield
    
    
    *
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    *
    
    
    
    6.0
    
    
    
    4.1
    
    
    
    4.7Weighted average grant date fair value
    
    
    *
    
    
    $
    1.28
    
    
    $
    1.83
    
    
    $
    1.04Restricted stock awards:Weighted average grant date fair value
    
    
    *
    
    
    $
    *
    
    
    
    *
    
    
    $
    2.28Restricted stock units:Weighted average grant date fair value
    
    $
    7.49
    
    
    $
    2.51
    
    
    $
    4.20
    
    
    $
    2.35Employee Stock Purchase Plan:Volatility
    
    
    *
    %
    
    
    *
    %
    
    
    64.8
    %
    
    
    77.7
    %Risk-free interest rate
    
    
    *
    %
    
    
    *
    %
    
    
    0.2
    %
    
    
    1.2
    %Dividend yield
    
    
    *
    %
    
    
    *
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    *
    
    
    
    *
    
    
    
    0.5
    
    
    
    0.5Weighted average grant date fair value
    
    $
    *
    
    
    $
    *
    
    
    $
    1.70
    
    
    $
    0.90
 
 *
    
    No grants during the period 6




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Three Months Ended February 28,
    
    
    Nine Months Ended February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of sales
    
    $
    557
    
    
    $
    596
    
    
    $
    1,688
    
    
    $
    1,916Sales and marketing
    
    
    2,147
    
    
    
    1,371
    
    
    
    5,818
    
    
    
    4,742Research and development
    
    
    538
    
    
    
    552
    
    
    
    1,437
    
    
    
    2,329General and administrative
    
    
    3,219
    
    
    
    3,144
    
    
    
    8,636
    
    
    
    8,756Restructuring charges
    
    
    
    
    
    
    444
    
    
    
    
    
    
    
    444Stock-based
compensation expense
before tax
    
    $
    6,461
    
    
    $
    6,107
    
    
    $
    17,579
    
    
    $
    18,187
 Stock Options
 Nine Months Ended February 28,2010
    
    
    2009Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageshares
    
    
    exercise price
    
    
    shares
    
    
    exercise priceOutstanding May 31, 2009 and 2008
    
    
    28,361
    
    
    $
    4.92
    
    
    
    43,925
    
    
    $
    4.98Granted
    
    
    2,419
    
    
    
    4.00
    
    
    
    1,403
    
    
    
    2.30Exercised
    
    
    (6,590
    )
    
    
    3.99
    
    
    
    (979
    )
    
    
    1.48Forfeited
    
    
    (326
    )
    
    
    4.01
    
    
    
    (3,239
    )
    
    
    4.34Expired
    
    
    (2,526
    )
    
    
    6.12
    
    
    
    (11,342
    )
    
    
    5.39Outstanding February 28, 2010 and 2009
    
    
    21,338
    
    
    $
    4.97
    
    
    
    29,768
    
    
    $
    4.88
    WeightedWeighted
    
    AverageNumber of
    
    average
    
    Remaining
    
    AggregateShares
    
    Grant-Date
    
    Contractual
    
    Intrinsic Value(in thousands)
    
    Fair Value
    
    Life (in years)
    
    (in thousands)Vested and
expected to vest at
February 28, 2010
    
    
    18,992
    
    
    $
    5.16
    
    
    
    3.3
    
    
    $
    62,927
 7




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Restricted Stock Awards.
 Nine Months Ended February 28,2010
    
    
    2009Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageShares
    
    
    Grant-Date
    
    
    Shares
    
    
    Grant-Date(unvested)
    
    
    Fair Value
    
    
    (unvested)
    
    
    Fair ValueOutstanding May 31, 2009 and 2008
    
    
    1,459
    
    
    $
    2.94
    
    
    
    3,095
    
    
    $
    3.43Granted
    
    
    
    
    
    
    
    
    
    
    325
    
    
    
    2.28Vested
    
    
    (337
    )
    
    
    3.27
    
    
    
    (734
    )
    
    
    3.94Forfeited
    
    
    (17
    )
    
    
    4.64
    
    
    
    (745
    )
    
    
    3.75Outstanding February 28, 2010 and 2009
    
    
    1,105
    
    
    $
    2.82
    
    
    
    1,941
    
    
    $
    2.92
  Restricted Stock Units.
 Nine Months Ended February 28,2010
    
    
    2009Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageShares
    
    
    Grant-Date
    
    
    Shares
    
    
    Grant-Date(unvested)
    
    
    Fair Value
    
    
    (unvested)
    
    
    Fair ValueOutstanding May 31, 2009 and 2008
    
    
    6,161
    
    
    $
    2.78
    
    
    
    5,744
    
    
    $
    3.59Granted
    
    
    6,062
    
    
    
    4.20
    
    
    
    5,071
    
    
    
    2.35Vested
    
    
    (2,192
    )
    
    
    3.01
    
    
    
    (2,445
    )
    
    
    3.51Forfeited
    
    
    (536
    )
    
    
    3.40
    
    
    
    (1,246
    )
    
    
    3.16Outstanding February 28, 2010 and 2009
    
    
    9,495
    
    
    $
    3.60
    
    
    
    7,124
    
    
    $
    2.81
  Employee Stock Purchase Plan.
 8




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NOTE 3: FAIR VALUE
 Fair Value Hierarchy
   Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.Level 2 Include other inputs that are directly or indirectly observable in the
marketplace.Level 3 Unobservable inputs which are supported by little or no market activity.
  Assets Measured at Fair Value on a Recurring Basis
  Fair Value Measurements at Reporting Date UsingQuoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs
    
    
    Total(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Balance(In thousands)AssetsCash and equivalents:Time deposits and bank deposits
with a maturity less than 3
months
    
    $
    
    
    
    $
    441,138
    
    
    $
    
    
    
    $
    441,138Money market fund deposits
    
    
    248,776
    
    
    
    
    
    
    
    
    
    
    
    248,776China government bonds and bank
bills with a maturity of less
than 3 months
    
    
    105,100
    
    
    
    
    
    
    
    
    
    
    
    105,100Total assets measured at fair value
    
    $
    353,876
    
    
    $
    441,138
    
    
    $
    
    
    
    $
    795,014
  NOTE 4. REALTEK PATENT DISPUTE RESOLUTION
  9




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NOTE 5. RESTRUCTURING CHARGES
   
    
    reduced our workforce;
    
    continued efforts to consolidate and dispose of excess facilities; and
    
    shifting the focus of our direct-touch sales force to accommodate our shift to
the enterprise market
    Fiscal 2010 Actions
  Employee
    
    
    OtherSeparation
    
    
    RestructuringExpense
    
    
    Costs
    
    
    TotalBalance as of May 31, 2009
    
    $
    
    
    
    $
    
    
    
    $
    Provisions
    
    
    2,528
    
    
    
    150
    
    
    
    2,678Payments and non-cash charges
    
    
    (2,416
    )
    
    
    (150
    )
    
    
    (2,566
    )Balance as of February 28, 2010
    
    $
    112
    
    
    $
    
    
    
    $
    112
 10




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Fiscal 2007 through 2009 Actions
  EmployeeSeparation
    
    
    Facilities-relatedExpense
    
    
    Charges
    
    
    TotalBalance as of May 31, 2009
    
    $
    1,477
    
    
    $
    47
    
    
    $
    1,524Provisions
    
    
    52
    
    
    
    2
    
    
    
    54Payments and non-cash charges
    
    
    (1,529
    )
    
    
    (12
    )
    
    
    (1,541
    )Balance as of February 28, 2010
    
    $
    
    
    
    $
    37
    
    
    $
    37
   NOTE 6. INCOME TAXES
      11




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NOTE 7. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    41,391
    
    
    $
    1,867
    
    
    $
    68,844
    
    
    $
    94,574Other comprehensive income:Change in accumulated
translation adjustments
    
    
    (1,212
    )
    
    
    (2,307
    )
    
    
    1,596
    
    
    
    2,194Total comprehensive income (loss)
    
    $
    40,179
    
    
    $
    (440
    )
    
    $
    70,440
    
    
    $
    96,768
 NOTE 8. NET INCOME PER SHARE
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,(in thousands except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Determination of shares:Weighted average shares outstanding
    
    
    396,253
    
    
    
    384,679
    
    
    
    392,905
    
    
    
    393,868Assumed conversion of dilutive stock options
    
    
    8,460
    
    
    
    789
    
    
    
    5,694
    
    
    
    873Assumed conversion of restricted stock (awards and units)
    
    
    6,833
    
    
    
    909
    
    
    
    5,172
    
    
    
    491Diluted weighted average shares outstanding
    
    
    411,546
    
    
    
    386,377
    
    
    
    403,771
    
    
    
    395,232Basic earnings per share
    
    $
    0.10
    
    
    $
    0.00
    
    
    $
    0.17
    
    
    $
    0.24Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.00
    
    
    $
    0.17
    
    
    $
    0.24
  NOTE 9. INVENTORIES
  February 28, 2010
    
    
    May 31, 2009Finished goods
    
    $
    93,658
    
    
    $
    69,860Work-in-process
    
    
    4,287
    
    
    
    3,420Raw materials
    
    
    17,027
    
    
    
    17,115Total
    
    $
    114,972
    
    
    $
    90,395
 12




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##### Table of Contents



NOTE 10. INTANGIBLE ASSETS, NET
  February 28, 2010
    
    May 31, 2009Weighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemainingAmortization
    
    
    
    
    
    Accumulated
    
    
    
    
    
    Amortization
    
    
    
    
    
    AccumulatedPeriod
    
    Gross
    
    Amortization
    
    Net
    
    Period
    
    Gross
    
    Amortization
    
    NetExisting technology
    
    
    2.8
    
    
    $
    398,454
    
    
    $
    (312,636
    )
    
    $
    85,818
    
    
    
    3.6
    
    
    $
    398,178
    
    
    $
    (272,460
    )
    
    $
    125,718Trademark
    
    NA
    
    
    55,502
    
    
    
    
    
    
    
    55,502
    
    
    NA
    
    
    55,502
    
    
    
    
    
    
    
    55,502OEM agreement
    
    
    0.3
    
    
    
    26,883
    
    
    
    (24,668
    )
    
    
    2,215
    
    
    
    1.0
    
    
    
    23,777
    
    
    
    (14,852
    )
    
    
    8,925Maintenance agreements
    
    
    1.0
    
    
    
    19,000
    
    
    
    (16,100
    )
    
    
    2,900
    
    
    
    1.7
    
    
    
    19,000
    
    
    
    (13,724
    )
    
    
    5,276Other
    
    
    1.3
    
    
    
    22,706
    
    
    
    (20,709
    )
    
    
    1,997
    
    
    
    2.0
    
    
    
    22,697
    
    
    
    (19,494
    )
    
    
    3,203$
    522,545
    
    
    $
    (374,113
    )
    
    $
    148,432
    
    
    
    
    
    
    $
    519,154
    
    
    $
    (320,530
    )
    
    $
    198,624
   Remainderof 2010
    
    2011
    
    2012
    
    2013
    
    2014
    
    2015Amortization expense
    
    $
    16,451
    
    
    $
    42,242
    
    
    $
    17,144
    
    
    $
    17,093
    
    
    
    
    
    
    
    
   NOTE 11. ACCRUED WARRANTY
  13




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##### Table of Contents



Nine Months EndedFebruary 28,2010
    
    
    2009Accrued warranty, beginning of period
    
    $
    29,587
    
    
    $
    36,897Cost of warranty claims processed during the period
    
    
    (18,596
    )
    
    
    (23,613
    )Provision for warranties related to products sold during the period
    
    
    14,994
    
    
    
    19,308Accrued warranty, end of period
    
    $
    25,985
    
    
    $
    32,592
 NOTE 12. LONG-TERM DEBT AND OTHER BANK OBLIGATIONS
 Senior Secured Credit Agreement  H3C Holdings Limited
   Leverage Ratio
    
    LIBOR +
    
    Base Rate +>3.0:1.0
    
    
    2.25
    %
    
    
    1.25
    %£3.0:1.0 but > 2.0:1.0
    
    
    2.00
    %
    
    
    1.00
    %£2.0:1.0 but > 1.0:1.0
    
    
    1.75
    %
    
    
    0.75
    %£1.0:1.0
    
    
    1.50
    %
    
    
    0.50
    %
     14




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##### Table of Contents



Calendar Year
    
    3Com Fiscal Year
    
    Tranche A
    
    Tranche B2010
    
    2011
    
    
    46,000
    
    
    
    2,0002011
    
    2012
    
    
    
    
    
    
    20,0002012
    
    2013
    
    
    
    
    
    
    44,000
   Other Bank Obligations
  NOTE 13. SEGMENT INFORMATION
    15




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##### Table of Contents



Three Months Ended February 28, 2010Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    187,963
    
    
    $
    123,401
    
    
    $
    
    
    
    $
    37,868
    
    
    $
    (3,352
    )c
    
    $
    345,880Standard margin
    
    
    133,300
    
    
    
    79,033
    
    
    
    
    
    
    
    32,076
    
    
    
    (557
    )d
    
    
    243,852Direct sales & marketing expenses
    
    
    43,109
    
    
    
    26,354
    
    
    
    
    
    
    
    13,543
    
    
    
    2,147
    d
    
    
    85,153Segment contribution profit (loss)
    
    
    90,191
    
    
    
    52,679
    
    
    
    
    
    
    
    18,533
    
    
    
    (2,704
    )
    
    
    158,699Research & development expenses
    
    
    
    
    
    
    
    
    
    
    40,409
    
    
    
    7,050
    
    
    
    538
    d
    
    
    47,997Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11,483
    
    
    $
    Other operating expenses
    
    
    
    
    
    
    
    
    
    
    61,567
    
    
    
    4,183
    
    
    
    22,574
    e
    
    
    88,324Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,378
 Three Months Ended February 28, 2009Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    190,385
    
    
    $
    102,836
    
    
    $
    
    
    
    $
    33,284
    
    
    $
    (1,798
    )c
    
    $
    324,707Standard margin
    
    
    128,160
    
    
    
    61,365
    
    
    
    
    
    
    
    28,288
    
    
    
    (596
    )d
    
    
    217,217Direct sales & marketing expenses
    
    
    36,581
    
    
    
    23,360
    
    
    
    
    
    
    
    10,882
    
    
    
    1,371
    d
    
    
    72,194Segment contribution profit (loss)
    
    
    91,579
    
    
    
    38,005
    
    
    
    
    
    
    
    17,406
    
    
    
    (1,967
    )
    
    
    145,023Research & development expenses
    
    
    
    
    
    
    
    
    
    
    37,574
    
    
    
    7,103
    
    
    
    552
    d
    
    
    45,229Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,303
    
    
    $
    Other operating expenses
    
    
    
    
    
    
    
    
    
    
    56,146
    
    
    
    9,488
    
    
    
    32,660
    e
    
    
    98,294Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,500
 16




---



##### Table of Contents



Nine Months Ended February 28, 2010Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    509,273
    
    
    $
    349,862
    
    
    $
    
    
    
    $
    106,334
    
    
    $
    (6,923
    )c
    
    $
    958,546Standard margin
    
    
    353,397
    
    
    
    215,553
    
    
    
    
    
    
    
    89,960
    
    
    
    (1,688
    )d
    
    
    657,222Direct sales & marketing expenses
    
    
    117,520
    
    
    
    75,663
    
    
    
    
    
    
    
    37,325
    
    
    
    5,818
    d
    
    
    236,326Segment contribution profit (loss)
    
    
    235,877
    
    
    
    139,890
    
    
    
    
    
    
    
    52,635
    
    
    
    (7,506
    )
    
    
    420,896Research & development expenses
    
    
    
    
    
    
    
    
    
    
    107,429
    
    
    
    19,499
    
    
    
    1,437
    d
    
    
    128,365Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    33,136
    
    
    $
    Other operating expenses
    
    
    
    
    
    
    
    
    
    
    170,062
    
    
    
    13,421
    
    
    
    69,054
    e
    
    
    252,537Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    39,994
 Nine Months Ended February 28, 2009Networking Business
    
    
    TippingPointRest of
    
    
    
    
    
    SecurityWorld
    
    
    
    
    
    BusinessChina-based
    
    
    Sales
    
    
    Central
    
    
    Tipping
    
    
    Eliminations/(in thousands)
    
    sales region
    
    
    Region
    
    
    Functions(a)
    
    
    Point(b)
    
    
    Other
    
    
    TotalSales
    
    $
    565,597
    
    
    $
    368,838
    
    
    $
    
    
    
    $
    92,499
    
    
    $
    (5,015
    )c
    
    $
    1,021,919Standard margin
    
    
    375,588
    
    
    
    215,479
    
    
    
    
    
    
    
    76,962
    
    
    
    (1,916
    )d
    
    
    666,113Direct sales & marketing expenses
    
    
    106,194
    
    
    
    77,254
    
    
    
    
    
    
    
    32,873
    
    
    
    4,742
    d
    
    
    221,063Segment contribution profit (loss)
    
    
    269,394
    
    
    
    138,225
    
    
    
    
    
    
    
    44,089
    
    
    
    (6,658
    )
    
    
    445,050Research & development expenses
    
    
    
    
    
    
    
    
    
    
    118,603
    
    
    
    20,698
    
    
    
    2,329
    d
    
    
    141,630Segment income
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    23,391
    
    
    $
    Other operating expenses
    
    
    
    
    
    
    
    
    
    
    177,697
    
    
    
    22,641
    
    
    
    23,797
    e
    
    
    224,135Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    79,285
 
 a 
    
    Included in our Central Function results were depreciation expenses of $4.4 million
and $8.1 million
for the three months ended February 28, 2010 and 2009, respectively, and $14.2 million and
$21.1 million
for the nine months ended February 28, 2010 and 2009, respectively.b 
    
    Included in our TippingPoint segment profit were depreciation expenses of $0.8 million
and $0.8 million
for the three months ended February 28, 2010 and 2009, respectively, and $2.8 million and $2.8
million
for the nine months ended February 28, 2010 and 2009, respectively.c 
    
    Represents eliminations for inter-company revenue between Networking and TippingPoint
during the respective
periods.d 
    
    Represents stock-based compensation in all periods.e 
    
    Includes stock-based compensation, amortization, and restructuring in all periods plus
acquisition related costs,
proceeds from the Realtek patent dispute resolution, property and equipment impairment and
legal settlement
accruals where applicable. 17




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##### Table of Contents



Identifiable assets (in thousands)
    
    February 28, 2010
    
    
    May 31, 2009China-based sales region(1)(2)
    
    $
    1,371,856
    
    
    $
    1,378,059Rest of World sales region(1)
    
    
    1,029,098
    
    
    
    875,788TippingPoint
    
    
    245,708
    
    
    
    228,440Eliminations(3)
    
    
    (713,714
    )
    
    
    (666,930
    )Total
    
    $
    1,932,948
    
    
    $
    1,815,357
 
 (1)
    
    Included in our identifiable assets for both our China-based sales region and Rest of World sales region are Central Function assets. We
do not segregate these assets as the CODM does not review the segment assets in that manner.(2)
    
    Our China-based sales region identifiable assets are the same as those held by our H3C subsidiary.(3)
    
    The eliminations primarily relate to the Rest of World sales region investment in subsidiaries and intercompany transactions. Nine Months EndedFebruary 28,Total Expenditures for Additions to Property and Equipment (in thousands)
    
    2010
    
    
    2009China-based sales region(1)
    
    $
    3,301
    
    
    $
    4,934Rest of World sales region(1)
    
    
    6,652
    
    
    
    5,585TippingPoint
    
    
    1,217
    
    
    
    2,259Total
    
    $
    11,170
    
    
    $
    12,778
 
 (1)
    
    Included in our capital expenditures for both our China-based
sales region and Rest of World sales region are Central Function
expenditures for additions to property and equipment. We do not
segregate these expenditures as the CODM does not review the
segment in that manner. ®
 Three Months Ended February 28,
    
    
    Nine Months Ended February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Switches and routers
    
    $
    234,433
    
    
    
    67.8
    %
    
    $
    227,583
    
    
    
    70.1
    %
    
    $
    643,194
    
    
    
    67.1
    %
    
    $
    738,343
    
    
    
    72.3
    %Other networking equipment
    
    
    48,521
    
    
    
    14.0
    %
    
    
    41,679
    
    
    
    12.8
    %
    
    
    141,344
    
    
    
    14.7
    %
    
    
    126,311
    
    
    
    12.4
    %Security
    
    
    48,286
    
    
    
    14.0
    %
    
    
    43,553
    
    
    
    13.4
    %
    
    
    135,387
    
    
    
    14.1
    %
    
    
    122,682
    
    
    
    12.0
    %Services
    
    
    14,640
    
    
    
    4.2
    %
    
    
    11,892
    
    
    
    3.7
    %
    
    
    38,621
    
    
    
    4.1
    %
    
    
    34,583
    
    
    
    3.3
    %Total
    
    $
    345,880
    
    
    
    100
    %
    
    $
    324,707
    
    
    
    100
    %
    
    $
    958,546
    
    
    
    100
    %
    
    $
    1,021,919
    
    
    
    100
    %
 18




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##### Table of Contents



NOTE 14. GEOGRAPHIC INFORMATION
  Three Months Ended February 28,
    
    
    Nine Months Ended February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009China
    
    $
    187,963
    
    
    $
    183,758
    
    
    $
    503,274
    
    
    $
    544,136Europe, Middle East, and Africa
    
    
    59,134
    
    
    
    52,982
    
    
    
    161,037
    
    
    
    181,348North America
    
    
    45,839
    
    
    
    43,300
    
    
    
    151,278
    
    
    
    144,461Asia Pacific (except China)
    
    
    24,049
    
    
    
    23,850
    
    
    
    71,738
    
    
    
    81,147Latin and South America
    
    
    28,895
    
    
    
    20,817
    
    
    
    71,219
    
    
    
    70,827Total
    
    $
    345,880
    
    
    $
    324,707
    
    
    $
    958,546
    
    
    $
    1,021,919
  NOTE 15. LITIGATION
    19




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##### Table of Contents



sine die sine die
  20




---



##### Table of Contents



NOTE 16. PROPOSED ACQUISITION OF THE COMPANY
      21




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  BUSINESS OVERVIEW
 ® ® ®
  22




---



##### Table of Contents




    
    Performance  Bandwidth demands have increased along with the number of users and
applications  IP telephony, videoconferencing, streaming multimedia and others  on
enterprise networks, yet performance requirements never abate. 3Com routers, switches and
security devices provide robust throughput and traffic optimization applications to ensure
high-quality networking even in the most challenging enterprise network environments.
    
    Cost effectiveness  Todays enterprise customers are seeking cost-effective solutions
that optimize the value of their network infrastructure investment. 3Com products are
designed to be cost-effective, competitively priced and energy efficient. 3Coms
single-pane, intuitive network management platform minimizes time spent training IT staff
and network administrators, helping to further reduce overall TCO.
    
    Security  Todays enterprises need to protect themselves from a constantly evolving
spectrum of internal and external threats to ensure the safety of their mission-critical
information. 3Coms pervasive network solutions provide granular oversight, control access,
quarantine malicious programs and files, and restore data.
      
    
    Switches and routers;
    
    Other networking equipment;
    
    Security; and
    
    Services.
  Business Environment and Future Trends
  23




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##### Table of Contents



Technology Strategy
  Revenue and Market Share Goals
    
    
    China In China, we have been successful in direct-touch sales to enterprise and
government customers. To maintain a leadership position in China, we intend to increase our
focus on direct-touch sales as well as pursue other distribution channels. We believe that
growing market share in China will be more challenging than in the past given that we
already have a significant enterprise networking market share in China. We also intend to
continue to introduce innovative new product offerings in the China market, such as IP video
surveillance and IP storage, which may offer additional growth opportunities.
  
    
    Emerging markets outside of China We expect to target growth opportunities outside of
China in other developing markets. We believe that our successful penetration of the Chinese
market has provided experience that is transferable to many emerging markets. We believe
this experience will position us to gain market share in developing markets.
    
    Developed global markets Our goal in developed markets is to increase our market share.
Our strategy is to focus on large enterprise and government accounts and to implement this
strategy we intend to increase go to market resources. We intend to offer these customers
our comprehensive end to end solutions and highlight our products price to performance
value proposition and energy efficiency. Our goal is to be well positioned for a more robust
economic recovery and in fact we have started to see some stabilization in recent months.
 24




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Profitability and Cash Generation Objectives
   Significant Event
   Segment Reporting
   25




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##### Table of Contents



Summary of Three Months Ended February 28, 2010 Financial Performance
 
    
    Our sales in the three months ended February 28, 2010 were $345.9 million, compared to
sales of $324.7 million in the three months ended February 28, 2009, an increase of $21.2
million, or 6.5 percent.
    
    Our gross margin improved to 60.4 percent in the three months ended February 28, 2010
from 57.2 percent in the three months ended February 28, 2009.
    
    Our operating expenses (income) in the three months ended February 28, 2010 were $186.4
million, compared to $184.3 million in the three months ended February 28, 2009, a net
increase of $2.1 million, or 1.1 percent.
    
    Our net income in the three months ended February 28, 2010 was $41.4 million, compared
to net income of $1.9 million in the three months ended February 28, 2009. Included in net
income in the three months ended February 28, 2009 was a benefit of approximately $9.9
million as a result of a decision by the Chinese tax authorities to grant the Company key
software developer status which entitles the Company to a 10 percent tax rate in China for
the calendar year ended December 31, 2009.
    
    Our balance sheet contains cash and equivalents and short term investments of $795.0
million as of February 28, 2010, compared to cash and equivalents and short term
investments of $644.2 million at the end of fiscal 2009. The balance sheet also includes
long-term debt of $112 million with $48 million classified as a current liability as of
February 28, 2010, compared to long-term debt of $200 million with $48 million classified
as a current liability as of May 31, 2009.
 Summary of Nine Months Ended February 28, 2010 Financial Performance
 
    
    Our sales in the nine months ended February 28, 2010 were $958.5 million, compared to
sales of $1,021.9 million in the nine months ended February 28, 2009, a decrease of $63.4
million, or 6.2 percent.
    
    Our gross margin improved to 59.4 percent in the nine months ended February 28, 2010
from 56.3 percent in the nine months ended February 28, 2009.
    
    Our operating expenses (income) in the nine months ended February 28, 2010 were $529.0
million, compared to $496.0 million in the nine months ended February 28, 2009, a net
increase of $33.0 million, or 6.7 percent. Included in the nine months ended February 28,
2009 operating expenses (income) is $70.0 million of income related to the Realtek patent
dispute resolution.
    
    Our net income in the nine months ended February 28, 2010 was $68.8 million, compared to
net income of $94.6 million in the nine months ended February 28, 2009. Included in the
nine months ended February 28, 2010, is a $10.8 million income tax benefit due to the
favorable determination of our calendar 2008 China tax rate and a benefit of approximately
$9.9 million as a result of a decision by the Chinese tax authorities to grant the Company
key software developer status which entitles the Company to a 10 percent tax rate in
China for the calendar year ended December 31, 2009. Included in the nine months ended
February 28, 2009 net income is $70.0 million of income related to the Realtek patent
dispute resolution.
 CRITICAL ACCOUNTING POLICIES
  26




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##### Table of Contents



RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED FEBRUARY 28, 2010 AND 2009
  Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2010
    
    2009
    
    2010
    
    2009Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    39.6
    
    
    
    42.8
    
    
    
    40.6
    
    
    
    43.7Gross profit margin
    
    
    60.4
    
    
    
    57.2
    
    
    
    59.4
    
    
    
    56.3Operating expenses (income):Sales and marketing
    
    
    29.1
    
    
    
    26.3
    
    
    
    29.1
    
    
    
    25.7Research and development
    
    
    13.9
    
    
    
    13.9
    
    
    
    13.4
    
    
    
    13.8General and administrative
    
    
    6.1
    
    
    
    8.5
    
    
    
    7.1
    
    
    
    7.9Amortization
    
    
    4.8
    
    
    
    7.1
    
    
    
    5.3
    
    
    
    7.2Realtek patent resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.8
    )Restructuring charges
    
    
    0.0
    
    
    
    0.9
    
    
    
    0.3
    
    
    
    0.7Operating expenses, net
    
    
    53.9
    
    
    
    56.7
    
    
    
    55.2
    
    
    
    48.5Operating income
    
    
    6.5
    
    
    
    0.5
    
    
    
    4.2
    
    
    
    7.8Interest income (expense), net
    
    
    0.2
    
    
    
    (1.0
    )
    
    
    (0.2
    )
    
    
    (0.5
    )Other income, net
    
    
    5.7
    
    
    
    5.1
    
    
    
    3.8
    
    
    
    4.4Income before income taxes
    
    
    12.4
    
    
    
    4.6
    
    
    
    7.8
    
    
    
    11.7Income tax provision
    
    
    (0.4
    )
    
    
    (4.0
    )
    
    
    (0.6
    )
    
    
    (2.4
    )Net income
    
    
    12.0
    %
    
    
    0.6
    %
    
    
    7.2
    %
    
    
    9.3
    %
 Sales
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009China-based sales region
    
    $
    188.0
    
    
    $
    190.4
    
    
    $
    509.3
    
    
    $
    565.6Rest of World sales region
    
    
    123.4
    
    
    
    102.8
    
    
    
    349.8
    
    
    
    368.8TippingPoint security business
    
    
    37.9
    
    
    
    33.3
    
    
    
    106.3
    
    
    
    92.5Eliminations and other
    
    
    (3.4
    )
    
    
    (1.8
    )
    
    
    (6.9
    )
    
    
    (5.0
    )Consolidated sales
    
    $
    345.9
    
    
    $
    324.7
    
    
    $
    958.5
    
    
    $
    1,021.9
  27




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Three Months Ended February 28,
    
    Nine Months Ended  February 28,2010
    
    2009
    
    2010
    
    2009Switches and routers
    
    $
    234.4
    
    
    
    68
    %
    
    $
    227.6
    
    
    
    70
    %
    
    $
    643.2
    
    
    
    67
    %
    
    $
    738.3
    
    
    
    72
    %Other networking equipment
    
    
    48.5
    
    
    
    14
    %
    
    
    41.7
    
    
    
    13
    %
    
    
    141.3
    
    
    
    15
    %
    
    
    126.3
    
    
    
    13
    %Security
    
    
    48.3
    
    
    
    14
    %
    
    
    43.5
    
    
    
    13
    %
    
    
    135.4
    
    
    
    14
    %
    
    
    122.7
    
    
    
    12
    %Services
    
    
    14.7
    
    
    
    4
    %
    
    
    11.9
    
    
    
    4
    %
    
    
    38.6
    
    
    
    4
    %
    
    
    34.6
    
    
    
    3
    %Total
    
    $
    345.9
    
    
    
    100
    %
    
    $
    324.7
    
    
    
    100
    %
    
    $
    958.5
    
    
    
    100
    %
    
    $
    1,021.9
    
    
    
    100
    %
   28




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##### Table of Contents



Gross Margin Percentage
  Three Months Ended
    
    Nine Months EndedFebruary 28,
    
    February 28,2010
    
    2009
    
    2010
    
    2009Networking business
    
    
    57.6
    %
    
    
    55.8
    %
    
    
    56.8
    %
    
    
    54.9
    %TippingPoint security business
    
    
    78.0
    %
    
    
    66.6
    %
    
    
    76.0
    %
    
    
    67.7
    %Consolidated margin
    
    
    60.4
    %
    
    
    57.2
    %
    
    
    59.4
    %
    
    
    56.3
    %
      29




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##### Table of Contents



Operating Expenses (Income)
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedFebruary 28,
    
    
    Change
    
    
    February 28,
    
    
    Change(dollars in millions)
    
    2010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Sales and marketing
    
    $
    100.5
    
    
    $
    85.5
    
    
    $
    15.0
    
    
    
    18
    %
    
    $
    279.1
    
    
    $
    262.9
    
    
    $
    16.2
    
    
    
    6
    %Research and development
    
    
    48.0
    
    
    
    45.2
    
    
    
    2.8
    
    
    
    6
    %
    
    
    128.4
    
    
    
    141.6
    
    
    
    (13.2
    )
    
    
    (9
    )%General and administrative
    
    
    21.3
    
    
    
    27.6
    
    
    
    (6.3
    )
    
    
    (23
    )%
    
    
    68.5
    
    
    
    80.7
    
    
    
    (12.2
    )
    
    
    (15
    )%Amortization
    
    
    16.5
    
    
    
    23.1
    
    
    
    (6.6
    )
    
    
    (29
    )%
    
    
    50.3
    
    
    
    73.4
    
    
    
    (23.1
    )
    
    
    (31
    )%Patent dispute resolution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    (70.0
    )
    
    
    70.0
    
    
    
    *Restructuring charges
    
    
    0.1
    
    
    
    2.9
    
    
    
    (2.8
    )
    
    
    (97
    )%
    
    
    2.7
    
    
    
    7.4
    
    
    
    (4.7
    )
    
    
    (64
    )%Operating expenses, net
    
    $
    186.4
    
    
    $
    184.3
    
    
    $
    2.1
    
    
    
    1
    %
    
    $
    529.0
    
    
    $
    496.0
    
    
    $
    33.0
    
    
    
    7
    %
 
 * -
    
    percentage calculation not meaningful. Sales and Marketing
  Research and Development
  eneral and Administrative
   Amortization
  Patent dispute resolution
  30




---



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Restructuring Charges
    Interest Expense, Net
  Other Income, Net
  31




---



##### Table of Contents



Income Tax Provision
    Segment Analysis (tables in thousands)
  China-based sales region:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Sales
    
    $
    187,963
    
    
    $
    190,385
    
    
    $
    509,273
    
    
    $
    565,597Standard margin
    
    
    133,300
    
    
    
    128,160
    
    
    
    353,397
    
    
    
    375,588Direct sales and marketing expenses
    
    
    43,109
    
    
    
    36,581
    
    
    
    117,520
    
    
    
    106,194Segment contribution profit
    
    $
    90,191
    
    
    $
    91,579
    
    
    $
    235,877
    
    
    $
    269,394
  Rest of World sales region:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Sales
    
    $
    123,401
    
    
    $
    102,836
    
    
    $
    349,862
    
    
    $
    368,838Standard margin
    
    
    79,033
    
    
    
    61,365
    
    
    
    215,553
    
    
    
    215,479Direct sales and marketing expenses
    
    
    26,354
    
    
    
    23,360
    
    
    
    75,663
    
    
    
    77,254Segment contribution profit
    
    $
    52,679
    
    
    $
    38,005
    
    
    $
    139,890
    
    
    $
    138,225
 32




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##### Table of Contents



Central Functions:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Research and development expenses
    
    $
    40,409
    
    
    $
    37,574
    
    
    $
    107,429
    
    
    $
    118,603Other operating expenses
    
    
    61,567
    
    
    
    56,146
    
    
    
    170,062
    
    
    
    177,697Total cost and expenses
    
    $
    101,976
    
    
    $
    93,720
    
    
    $
    277,491
    
    
    $
    296,300
  TippingPoint Security business:
 Three months ended
    
    
    Nine months endedFebruary 28,
    
    
    February 28,2010
    
    
    2009
    
    
    2010
    
    
    2009Sales
    
    $
    37,898
    
    
    $
    33,284
    
    
    $
    106,334
    
    
    $
    92,499Standard margin
    
    
    32,076
    
    
    
    28,288
    
    
    
    89,960
    
    
    
    76,962Direct sales and marketing expenses
    
    
    13,543
    
    
    
    10,882
    
    
    
    37,325
    
    
    
    32,873Segment contribution profit
    
    
    18,533
    
    
    
    17,406
    
    
    
    52,635
    
    
    
    44,089Research and development expenses
    
    
    7,050
    
    
    
    7,103
    
    
    
    19,499
    
    
    
    20,698Segment income
    
    $
    11,483
    
    
    $
    10,303
    
    
    $
    33,136
    
    
    $
    23,391
  33




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LIQUIDITY AND CAPITAL RESOURCES
  February 28,
    
    
    May 31,2010
    
    
    2009Cash and equivalents
    
    $
    795.0
    
    
    $
    545.8Short-term investments
    
    
    
    
    
    
    98.4Cash and equivalents and short-term investments
    
    $
    795.0
    
    
    $
    644.2
  Nine Months Ended February 28,2010
    
    
    2009Cash and equivalents, beginning of period
    
    $
    545.8
    
    
    $
    503.6Net cash provided by operating activities
    
    
    224.8
    
    
    
    196.3Net cash provided by (used in) investing activities
    
    
    87.5
    
    
    
    (12.5
    )Net cash used in financing activities
    
    
    (63.7
    )
    
    
    (136.3
    )Effect of exchange rate changes on cash and equivalents
    
    
    0.6
    
    
    
    8.9Cash and equivalents, end of period
    
    $
    795.0
    
    
    $
    560.0
       Calendar Year
    
    3Com Fiscal Year
    
    Tranche A
    
    Tranche B2010
    
    
    2011
    
    
    
    46,000
    
    
    
    2,0002011
    
    
    2012
    
    
    
    
    
    
    
    20,0002012
    
    
    2013
    
    
    
    
    
    
    
    44,000
 34




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Leverage Ratio
    
    LIBOR +
    
    Base Rate +>3.0:1.0
    
    
    2.25
    %
    
    
    1.25
    %≤3.0:1.0 but > 2.0:1.0
    
    
    2.00
    %
    
    
    1.00
    %≤2.0:1.0 but > 1.0:1.0
    
    
    1.75
    %
    
    
    0.75
    %≤1.0:1.0
    
    
    1.50
    %
    
    
    0.50
    %
 35




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##### Table of Contents



EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Accounting Pronouncements
 36




---



##### Table of Contents



Recently Issued and Adopted Accounting Pronouncements
 Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements
 Fair Value Measurements and Disclosures
  Impairments of Debt Securities
 Earnings Per Share:
 Recently Issued but Not Yet Adopted Accounting Pronouncements
 Revenue Arrangements with Multiple Deliverables
 37




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##### Table of Contents



Revenue Arrangements with Software Elements
 Variable Interest Entities and Transfers of Financial Assets and Extinguishments of Liabilities
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Sensitivity.
 Foreign Currency Exchange Risk.
  38




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ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Risk Related to Proposed Acquisition by Hewlett-Packard Company
 Our proposed acquisition by Hewlett-Packard Company creates unique risks in the time leading up to
closing, and there are also risks relating to completing the conditions to closing; if the
transaction is delayed or does not close, it could result in adverse effects on our business and
stock price.
  39




---



##### Table of Contents




    
    managements and our employees attention may be diverted from our day-to-day
business because matters related to the proposed acquisition may require substantial
commitments of their time and resources;
    
    we may lose key employees;
    
    our relationships with customers, partners and vendors may be substantially disrupted
as a result of uncertainties with regard to our business and prospects;
    
    certain costs related to the proposed acquisition, such as legal and accounting fees
and reimbursement of certain expenses, are payable by us whether or not the proposed
acquisition is completed;
    
    under certain circumstances, if the proposed acquisition is not completed we may be
required to pay a termination (break-up) fee of up to $99 million; and
    
    the market price of shares of our common stock may decline to the extent that the
current market price of those shares reflects a market assumption that the proposed
acquisition will be completed.
    40




---



##### Table of Contents



Risk Related to Global Economic Conditions
 If the global economic recovery continues to be slow, or if some or all of the regions in which we
operate experience a return to recessionary economic conditions, our results may suffer.
  
    
    reduced demand for our products in many regions as a result of constraints on information
technology-related capital spending by our customers;
    
    risk of excess and obsolete inventories;
    
    longer sales cycles;
    
    delayed and/or cancelled purchases due to factors such as tight credit conditions and
unfavorable local currency translation (noting that we denominate sales in USD in most
locations outside of China); and
    
    risk of longer cash cycles as customers take longer to pay us for products and services
and some customers deal with insolvency issues.
   Risks Related to Ability to Sustain and Increase Profitability and the Impact of our Secured
Indebtedness
 We may not be able to sustain or increase our profitability in the future.
  
    
    declining sales in certain regions;
    
    operating expenses that, as a percentage of sales, have exceeded our desired financial
model;
    
    significant senior leadership and other management changes;
    
    significant non-cash accounting charges;
    
    increased sales and marketing expense as part of a strategy to help grow our market
share; and
    
    disruptions and expenses resulting from our workforce reductions and employee attrition.
 
 41




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Our indebtedness could adversely affect our financial condition and ability to grow our business.
   
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of our cash flow from operations to
satisfy debt obligations, reducing the availability of capital to finance operations and
growth;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our
industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
   42




---



##### Table of Contents



Risks Related to China-based Sales region and Dependence Thereon
 We are significantly dependent on our China-based segment; if it is not successful we will likely
experience a material adverse impact to our business, business prospects and operating results.
  
    
    maintain a leading position in the networking equipment market in China;
    
    build profitable operations in other emerging markets throughout the world, but
particularly in the Asia Pacific region;
    
    offer new and innovative products and services to attract and retain a larger customer
base;
    
    increase awareness of the H3C brand and continue to develop customer loyalty;
    
    respond to rapidly changing competitive market conditions;
    
    respond to changes in the regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control of costs and expenses; and
    
    attract, retain and motivate qualified personnel.
    If, as expected, Huawei Technologies, or Huawei, continues to significantly reduce its business
with us, our business results will be materially adversely affected if we cannot increase other
business to offset the decline.
  43




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##### Table of Contents



Risk Related to Core Business Strategy
 If we cannot increase our enterprise account business, in particular outside of China, we likely
will not reach our growth and profitability goals.
     Risk Related to Personnel
 Our success is dependent on continuing to hire and retain qualified managers and other personnel
and reducing senior management turnover; if we are not successful in attracting and retaining key
personnel, our business will suffer.
  44




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##### Table of Contents



Risks Related to Competition
 Intense competition in the market for networking solutions and new or developing product markets
could prevent us from increasing revenue and profitability.
     Our competition with Huawei could have a material adverse effect on our sales and our results of
operations, particularly if Huawei increases its level of competition against us.
   45




---



##### Table of Contents



Risks Related to Business and Technology Strategy
 Our industry is characterized by a short product life cycle, and we may not be successful at
identifying and responding to new and emerging market, technology and product opportunities, or at
responding quickly enough to technologies or markets that are in decline.
  
    
    identify new market and product opportunities;
    
    predict which technologies and markets will see declining demand;
    
    develop and introduce new products and solutions (and new features and
functionality for existing products and solutions) in a timely manner;
    
    gain market acceptance of new products and solutions; and
    
    rapidly and efficiently transition our customers from older to newer enterprise
networking technologies.
  
    
    there is a delay in introducing new products, features or functionality;
    
    we lose key channel partners;
    
    our products do not satisfy customers in terms of features, functionality or
quality; or
    
    our products cost more to produce than we expect.
   Risks Related to Operations and Distribution Channels
 If we are not successful at partnering with system integrators and expanding our base of enterprise
channel partners, reaching our growth and profitability goals will be more challenging and we will
likely not reach our full potential.
  46




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A significant portion of our sales is derived from a small number of distributors. If any of these
channel partners reduces its business with us, our business could be adversely affected.
   We may be unable to manage our supply chain successfully, which would adversely impact our sales,
gross margin and profitability.
  
    
    our ability to accurately forecast demand for our products and services;
    
    our reliance on, and long-term arrangements with, third-party manufacturers (which places
much of the supply chain process out of our direct control, heightens the need for accurate
forecasting and reduces our ability to transition quickly to alternative supply chain
strategies); and
    
    our ability to minimize disruptions to our logistics and effectively manage disruptions
that do occur.
   If we fail to adequately evolve our financial and managerial control and reporting systems and
processes, our ability to manage and grow our business may be negatively affected.
  47




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##### Table of Contents



Risks Related to our Operations in the Peoples Republic of China
 Chinas legal and regulatory regime and changing political and economic environment may impact our
business in China.
  
    
    the promulgation of new laws and regulations and the interpretation of those laws and
regulations;
    
    enforcement and application of rules and regulations by the Chinese government
authorities and or court system;
    
    the introduction of measures to control growth or inflation or stimulate growth;
    
    any actions that limit our ability to develop, manufacture, import or sell our products
in China, or export our products outside of China, or to finance and operate our business in
China; or
    
    laws, rules or regulations that negatively impact our ability to pay dividends from China
to outside of China, or impose restrictions (including conditions or timing restrictions) or
additional taxes on such dividends.
  Uncertainties with respect to the Chinese legal and regulatory system may adversely affect us.
  If PRC tax benefits available to us are reduced or repealed, our profitability or cash flow could
suffer.
   48




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##### Table of Contents



If the Chinese VAT Authorities discontinue, reduce, or defer the VAT Software Subsidy Program, our
results will likely be adversely affected.
  H3C is subject to restrictions on paying dividends and making other payments to us.
  We are subject to risks relating to currency rate fluctuations and exchange controls and we do not
hedge this risk in China.
    49




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Risks Related to Intellectual Property
 If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and could lose sales.
   We may need to engage in complex and costly litigation in order to protect, maintain or enforce our
intellectual property rights; in some jurisdictions, such as China, our rights may not be as strong
as the rights we enjoy in the U.S.
   We may not be able to defend ourselves successfully against claims that we are infringing the
intellectual property rights of others.
  50




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##### Table of Contents



Risks Related to the Trading Market
 Fluctuations in our operating results and other factors may contribute to volatility in the market
price of our stock.
  
    
    announcements/expectations concerning the closing of our announced proposed acquisition
by Hewlett-Packard Company;
    
    fluctuations in our quarterly results of operations and cash flow;
    
    changes in our cash and equivalents and short term investment balances;
    
    our ability to execute on our strategic plan, including our core business strategy to
emphasize larger enterprise and government account business;
    
    general economic conditions on a global basis or in our key markets, such as China;
    
    variations between our actual financial results and published analysts expectations; and
    
    announcements by our competitors, and announcements by, sales to or loss of significant
customers.
  51




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We may be required to record additional significant charges to earnings if our goodwill or
intangible assets become impaired.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    Approximate DollarTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    Value of SharesNumber
    
    
    Average
    
    
    as Part of Publicly
    
    
    that May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Plans or ProgramsNovember 28, 2009 through December
25, 2009
    
    
    11,309
    (1)
    
    $
    7.40
    
    
    
    
    
    
    $
    December 26, 2009 through January 22, 2010
    
    
    15,915
    (1)
    
    
    7.59
    
    
    
    
    
    
    
    January 23, 2010 through February 26, 2010
    
    
    229,610
    (1)
    
    
    7.46
    
    
    
    
    
    
    
    Total
    
    
    256,834
    
    
    $
    7.47
    
    
    
    
    
    
    $
    
 
 (1)
    
    Includes shares surrendered to us to satisfy tax withholding obligations that arose upon the
vesting of restricted stock awards and units of 11,309 in December 2009, 15,915 in January
2010 and 229,610 in February 2010. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Proposal I
    
    For
    
    
    Against
    
    
    AbstainA Adoption of Merger Agreement:
    
    
    305,769,093
    
    
    
    5,361,511
    
    
    
    243,226
 Proposal II
    
    For
    
    
    Against
    
    
    AbstainAdjournment, if necessary:
    
    
    280,472,999
    
    
    
    30,500,059
    
    
    
    396,671
 
 ITEM 5. OTHER INFORMATION
  52




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##### Table of Contents



ITEM 6. EXHIBITS
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FiledNumber
    
    
    Exhibit Description
    
    Form
    
    
    File No.
    
    
    Exhibit
    
    
    Filing Date
    
    
    Herewith2.1
    
    
    Master Separation and Distribution
    
    
    10-Q
    
    
    
    002-92053
    
    
    
    2.1
    
    
    
    4/4/00Agreement between the Registrant and Palm,
Inc. effective as of December 13, 19992.2
    
    
    Indemnification and Insurance Matters
    
    
    10-Q
    
    
    
    002-92053
    
    
    
    2.11
    
    
    
    4/4/00Agreement between the Registrant and Palm,
Inc.2.3
    
    
    Agreement and Plan of Merger, dated
    
    
    8-K
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    12/16/04December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.2.4
    
    
    Securities Purchase Agreement by and
    
    
    8-K/A
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    3/30/06among 3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & Holding Co., Ltd., dated as of
October 28, 20052.5
    
    
    Stock Purchase Agreement by and
    
    
    8-K
    
    
    
    000-12867
    
    
    
    10.1
    
    
    
    12/27/06between Shenzhen Huawei Investment & Holding Co.,
Ltd. and 3Com Technologies, dated as of
December 22, 20062.6
    
    
    Agreement and Plan of Merger by and
    
    
    8-K/A
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    9/28/07among 3Com Corporation, Diamond II Holdings Inc.
and Diamond II Acquisition Corp., dated
September 28, 20072.7
    
    
    Agreement and Plan of Merger by and
    
    
    8-K
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    11/12/09among 3Com Corporation, Hewlett-Packard Company,
and Colorado Acquisition Corporation, dated
November 11, 20093.1
    
    
    Amended and Restated Certificate of
    
    
    8-K
    
    
    
    000-12867
    
    
    
    3.1
    
    
    
    9/24/09Incorporation filed with the Secretary of
State of the State of Delaware on September
23, 20093.2
    
    
    Registrants Bylaws, as amended on December 10, 2008
    
    
    8-K
    
    
    
    000-12867
    
    
    
    3.1
    
    
    
    12/16/084.1
    
    
    Third Amended and Restated Preferred
    
    
    8-A/A
    
    
    
    000-12867
    
    
    
    4.1
    
    
    
    11/27/02Shares Rights Agreement, dated as of November 4,
2002 (Rights Agreement)4.2
    
    
    Amendment No. 1 to Rights Agreement, dated as of September 28, 2007
    
    
    8-K/A
    
    
    
    000-12867
    
    
    
    4.1
    
    
    
    9/28/074.3
    
    
    Amendment No. 2 to Rights Agreement, dated as of November 11, 2009
    
    
    8-K
    
    
    
    000-12867
    
    
    
    4.1
    
    
    
    11/12/0931.1
    
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xand Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
 
 *
    
    Indicates a management contract or compensatory plan 53




---



##### Table of Contents



SIGNATURES
  3Com Corporation
(Registrant)Dated: April 6, 2010
    By:
    /s/   Jay ZagerJay ZagerExecutive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer and a duly authorized
officer of the registrant) 54




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FiledNumber
    
    
    Exhibit Description
    
    Form
    
    
    File No.
    
    
    Exhibit
    
    
    Filing Date
    
    
    Herewith2.1
    
    
    Master Separation and Distribution
    
    
    10-Q
    
    
    
    002-92053
    
    
    
    2.1
    
    
    
    4/4/00Agreement between the Registrant and Palm,
Inc. effective as of December 13, 19992.2
    
    
    Indemnification and Insurance Matters
    
    
    10-Q
    
    
    
    002-92053
    
    
    
    2.11
    
    
    
    4/4/00Agreement between the Registrant and Palm,
Inc.2.3
    
    
    Agreement and Plan of Merger, dated
    
    
    8-K
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    12/16/04December 13, 2004, by and among the
Registrant, Topaz Acquisition Corporation
and TippingPoint Technologies, Inc.2.4
    
    
    Securities Purchase Agreement by and
    
    
    8-K/A
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    3/30/06among 3Com Corporation, 3Com Technologies, Huawei
Technologies Co., Ltd. and Shenzen Huawei
Investment & Holding Co., Ltd., dated as of
October 28, 20052.5
    
    
    Stock Purchase Agreement by and
    
    
    8-K
    
    
    
    000-12867
    
    
    
    10.1
    
    
    
    12/27/06between Shenzhen Huawei Investment & Holding Co.,
Ltd. and 3Com Technologies, dated as of
December 22, 20062.6
    
    
    Agreement and Plan of Merger by and
    
    
    8-K/A
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    9/28/07among 3Com Corporation, Diamond II Holdings Inc.
and Diamond II Acquisition Corp., dated
September 28, 20072.7
    
    
    Agreement and Plan of Merger by and
    
    
    8-K
    
    
    
    000-12867
    
    
    
    2.1
    
    
    
    11/12/09among 3Com Corporation, Hewlett-Packard Company,
and Colorado Acquisition Corporation, dated
November 11, 20093.1
    
    
    Amended and Restated Certificate of
    
    
    8-K
    
    
    
    000-12867
    
    
    
    3.1
    
    
    
    9/24/09Incorporation filed with the Secretary of
State of the State of Delaware on September
23, 20093.2
    
    
    Registrants Bylaws, as amended on December 10, 2008
    
    
    8-K
    
    
    
    000-12867
    
    
    
    3.1
    
    
    
    12/16/084.1
    
    
    Third Amended and Restated Preferred
    
    
    8-A/A
    
    
    
    000-12867
    
    
    
    4.1
    
    
    
    11/27/02Shares Rights Agreement, dated as of November 4,
2002 (Rights Agreement)4.2
    
    
    Amendment No. 1 to Rights Agreement, dated as of September 28, 2007
    
    
    8-K/A
    
    
    
    000-12867
    
    
    
    4.1
    
    
    
    9/28/074.3
    
    
    Amendment No. 2 to Rights Agreement, dated as of November 11, 2009
    
    
    8-K
    
    
    
    000-12867
    
    
    
    4.1
    
    
    
    11/12/0931.1
    
    
    Certification of Principal Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Principal Financial Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Chief Executive Officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Xand Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
 
 *
    
    Indicates a management contract or compensatory plan 55